Global stocks fell on Wednesday, while the dollar and Treasury yields stayed strong, as traders pared back expectations for the pace and scale of rate cuts by the Federal Reserve this year.
The latest shift in rate expectations came after an upside surprise in U.S. inflation on Tuesday that showed the consumer price index (CPI) rose 3.1% on an annual basis, above forecasts for a 2.9% increase.
The data has prompted traders to slash their bets on where U.S. rates will go this year. Futures now point to about 90 basis points worth of cuts from the Fed by December, roughly four quarter-point drops, compared to 110 bps prior to the data release and 160 bps at the end of 2023.
With the prospect of a steep drop in interest rates ebbing, investors kept the pressure on global stocks, which had rallied strongly towards the end of last year on aggressive bets for rate cuts by major central banks globally in 2024.
The MSCI All-World index (.MIWD00000PUS), opens new tab, which hit two-year highs on Monday, was down 0.1%, following a drop on Wall Street overnight that pulled the S&P 500 (.SPX), opens new tab back below 5,000 points. U.S. futures , were up 0.2-0.3%.
Worryingly for investors, the CPI report showed an unexpected pickup in stickier elements, such as service-sector inflation and shelter, helped drive the overall increase.
“When you get a jump like this, and the year-on-year figures really show this rather than the monthly ones, that’s a shock because it just shows that it’s not all plain sailing and we may get more increases in inflation,” Trade Nation senior market analyst David Morrison said.
“We should be surprised by the jump in inflation, because I don’t think anyone was thinking about that. It was more how slowly do we get down towards 2% and this is like kicking the ladder away a bit,” he said.
In Europe, the STOXX (.STOXX), opens new tab edged up 0.1%, as a flurry of stronger earnings boosted the regional index.
Even Japan’s Nikkei (.N225), opens new tab, which hit its highest in 34 years on Tuesday, was not spared from the beating and fell 0.7%.
Source: https://www.reuters.com/markets/global-markets-wrapup-1-2024-02-14/